How tight liquidity drives T-Bills yield

The average yield on Nigerian Treasury bills spikes as financial system liquidity dropped, halting the ongoing rally in the secondary market for trading local debt instruments.

The upward yield repricing came ahead of the primary market auction to be conducted by the apex bank on Wednesday, according to its Nigerian Treasury bills issuance calendar.

At the auction, the CBN is expected to roll over N263.50 billion worth of bills to market participants. The Treasury market has seen yield dropping from 11 per cent to less than two per cent over a robust funding profile in the financial system amidst a dearth of alternative investment options.

Relatively, demand has been strong at both the primary and secondary market while the headline inflation rate continues to bubble, reducing the real return on naira assets across segments.

Last week, average system liquidity fell to N218.41 billion from a net long position of N452.55 billion in the previous week; driven by an outflow of N770.6 billion for bond auction that offset the impact of the N60.0 billion inflows from OMO maturities.

Thus, to meet cash needs, market participants, including some local banks sold off instruments across the curve to satisfy their financial obligations, traders said.

Amidst Nigeria’s new naira notes scarcity which induced crises, the Central Bank failed to refinance matured OMO bills while liquidity in the financial system was reduced by debit for FGN’s bond auction.

In the secondary market, traders reported that average Treasury bills yields rose 199 basis points to 4.1 per cent. By tenored, the 182-day instrument recorded the biggest change, up 309 basis points to 4.5 per cent last week.

The yield on the 91-day instrument also rose by 295 basis points to 4.1 per cent. On the other hand, due to positioning in the long-dated bills, the yield on the 364-day instrument declined 7 basis points to 3.8 per cent.

Money market data show that the overnight rate inched higher by 669 basis points to 17.8 per cent, as funding for FGN bond and FX auctions outweighed inflows from OMO maturities.

Projecting into the week, market analysts said they expect the outcome of the next primary market auction to shape the direction of yields in the secondary segment. A slew of analysts have positioned to see higher spot rates at the auction as liquidity level has reduced.

SIn January, analysts said the Nigerian Treasury bills market, which was more reflective of the elevated liquidity conditions, traded with a bullish bias, with average yield contracting by 3.8 per cent.

According to CardinalStone, the enhanced system liquidity condition reduced banks’ competition for funds, with the first net-deposit position recorded at the CBN discount window since March 2022.

READ ALSO: 2023 Elections under Threat as CBN yet to release.

“In our view, the elevated liquidity may have stemmed from coupons and maturities totalling N605.8 billion and the outcome of the naira re-design, which has led to a material increase in deposits to commercial banks”, the multi-asset investment firm said in a note.